Stock trading comes in two formats: delivery trading and intraday trading. Delivery trading is mostly for investors who wish to take or give delivery of stocks and hold them for some time. Intraday trading is preferred by traders who look at earning quick profits that come up due to the price movements of stocks throughout the day. Since intraday trading does not require the delivery of stocks, those who are new to the market are often confused about the requirement of a Demat account for the same.
Here, we will explain intraday trading and the need for a Demat account in this case.
What is intraday trading?
Intraday trading can be done in financial securities to make profits through speculation. In this type of trading, traders close their positions before the markets close on a given trading day. Intraday trading is for the short term since investors aim to fetch profits from the minute-by-minute price movements in the stock market. This type of trading can also be done using involves stock derivatives (futures and options).
Intraday trading can be time-consuming since it requires constant monitoring, tracking, and following timelines to make buy-sell decisions. It is best suited to traders who know how to make quick decisions, which stocks to buy/sell, keep up with the smallest of market trends, and are ready to take higher risks.
What is a Demat account?
One of the important requirements for buying or selling securities in the stock markets is a Demat or Dematerialized account. A Demat account is:
- somewhat similar to a bank account.
- an account where an investor can keep his/her shares or securities securely.
- required to hold financial securities in electronic form or digitally.
Securities that are bought through online trading are stored in a Demat account. This makes it easier for users to trade online. The securities that can be held in a Demat account include shares, exchange-traded funds, government securities, bonds, or mutual funds.
Is a Demat account essential for intraday trades?
Whether a trader/investor needs to open a Demat account depends on the type of transaction he/she generally executes.
As indicated above, a Demat account is required to hold your financial securities in electronic form. Intraday trades do not involve the delivery of shares. This eliminates the need to have a Demat account technically.
However, there may be many scenarios in which you may end up being at a disadvantage if you do not have a demat account. For Ex: At the end of the day it might become risky if you are not able to close your trades. In these scenarios, if you hold a demat account with some other broker, you may have to authorise that broker to transfer shares to square off your intraday trades. All these make for time-consuming and tedious procedure which can be best avoided by having a demat and trading account with the same broker.
In addition, when you have a demat account you could also consider pledging the shares held to trade in the Futures and Options segment. So it makes it worth it to have a Demat account with the same broker where you have your trading account.
Many broking platforms now offer zero Demat account opening charges for investors who are applying to open trading accounts.
Thus, one can opt to open both Demat and trading accounts with the same depository participant to ensure convenience in the future. This way, an investor can be both an intraday trader as well as a long-term investor who takes delivery of securities.
What are the benefits of a Demat account?
Long-term equity investors must open a Demat account to take delivery of securities and retain them in digital form until sold. Any stock market instrument that they may want to hold for a longer term, such as stocks, bonds, mutual funds, insurance, etc. will require them to have a Demat account. This is as per SEBI mandate.
Even if it is not needed in intraday trading, there can be several benefits that a demat account can offer. Some of them include:
- Safety of instruments,
- Easy accessibility,
- Prevention of fraud
Depository Participants offer Demat accounts in combination with trading accounts at the same cost. Therefore, it is advisable to open a demat account along with your trading account.
How is a Demat account different from a trading account?
A trading account acts as an interface for investors to buy and sell securities in the stock market. Once an investor buys shares, for instance, these are stored in electronic or digital format in the Demat account. The Demat account works in connection with the trading account to allow investors to buy/sell and hold various securities. Even if an investor wants to do intraday trading, it is essential to have a trading account.
Thus, stock market investments mandatorily require investors or traders to have a trading account, whereas a Demat account is required mainly for delivery-based trading.
Conclusion
While dealing in the stock markets, one has to be clear whether they want to do intraday trading or deliver-based long-term investment. This will help in determining whether they will need a Demat account. Also, looking at some of the benefits of having a Demat account, an investor can decide whether to have one.
FAQs
Yes, you can request to open a trading account without a Demat account. This is possible if you plan to only perform intraday trading, which does not require delivery of securities in the stock markets.
To open a Demat and trading account easily, you can download the Fisdom app on your smartphone. This new-age app allows a seamless KYC process and account opening from the comforts of your home.
Different brokers and brokerage platforms will have different charges for trading and Demat account opening. Some even offer to open these free of cost.
Seasoned investors who have a higher risk appetite can perform intraday trading. It is advisable for new investors to first gain sufficient knowledge about the stock markets before exploring this form of trading.
Intraday trading requires traders to square off their position before the closure of the market. Therefore, only such stocks that have enough liquidity must be selected for intraday trading. Highly liquid stocks such large-cap stocks are often preferred in intraday trading.
